Econ: Final: Multiple Choice I

Front 1

1. (Figure: AD–AS Model) Refer to the information in the figure. Suppose the economy is at YE with a price level of P1. Which of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD1 to AD2 as a result of an increase in the money supply?
A) YEandP2
B) YE and P1
C) Y1 and P2
D) YE and P3

Back 1

D) YE and P3

Front 2

2. In the classical model, it is thought that the longrun:
A) and short-run aggregate supply curves are both upward sloping.
B) aggregate supply curve is vertical and the short-run aggregate supply curve is upward sloping.
C) and short-run aggregate supply curves are both vertical.
D) aggregate supply curve is upward sloping and the short-run aggregate supply curve is vertical.

Back 2

C) and short-run aggregate supply curves are both vertical.

Front 3

3. Which of the following is the BEST explanation for an upward-sloping short-run aggregate supply curve?
A) Prices are perfectly flexible.
B) Wages are perfectly flexible.
C) Wages and prices of some goods are sticky in the short run.
D) Wages and prices of some goods are flexible in the short run but sticky in the long run.

Back 3

C) Wages and prices of some goods are sticky in the short run.

Front 4

4. In the short run in periods of low inflation, an increase in aggregate demand from a position of full employment leads to:
A) higher prices and higher unemployment.
B) higher prices and higher output.
C) lower prices and higher output.
D) lower prices and higher unemployment.

Back 4

B) higher prices and higher output.

Front 5

5. (Figure: Classical Model of the Price Level) Refer to the information in the figure. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, real GDP would:
A) not change.
B) increase from YE to Y1.
C) increase from Y1 to YE.
D) establish a new potential output.

Back 5

A) not change.

Front 6

6. (Figure: Classical Model of the Price Level) Refer to the information in the figure. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, the price level will:
A) not change.
B) increase from P1 to P2.
C) increase from P1 to P3.
D) decrease from P1 to P2.

Back 6

C) increase from P1 to P3.

Front 7

7. (Figure: Classical Model of the Price Level) Refer to the information in the figure. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, the equilibrium point would:
A) not change.
B) immediately move from E1 to E2.
C) immediately move from E2 to E1.
D) immediately move from E1 to E3.

Back 7

D) immediately move from E1 to E3.

Front 8

8. During periods of low inflation, the short-run aggregate supply curve is:
A) vertical.
B) horizontal.
C) upward sloping.
D) downward sloping.

Back 8

C) upward sloping.

Front 9

9. In the long run, any given percentage increase in the money supply:
A) decreases real GDP .
B) leads to an equal percentage increase in the overall price level.
C) increases real GDP .
D) leads to an equal percentage decrease in the unemployment rate.

Back 9

B) leads to an equal percentage increase in the overall price level.

Front 10

10. In economies with persistently high inflation, an increase in the money supply:
A) will translate into a proportional increase in the aggregate price level much faster than usual.
B) will translate into a proportional increase in the aggregate price level only in the long run.
C) will not affect either the aggregate price level or the aggregate output.
D) will translate into a proportional increase in the aggregate output much faster than usual.

Back 10

A) will translate into a proportional increase in the aggregate price level much faster
than usual.

Front 11

11. (Figure: AD–AS) Refer to the AD–AS diagram. Suppose the economy is initially at E1, where AD1 intersects SRAS1 and LRAS. Now, suppose that the AD1 shifts to AD2. That shift could be due to:
A) an increase in the aggregate price level.
B) a decrease in government expenditure.
C) an increase in tax rates.
D) an increase in money supply.

Back 11

D) an increase in money supply.

Front 12

12. (Figure: AD–AS) Refer to the AD–AS diagram. Suppose the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. Now, suppose that the SRAS1 will shift to SRAS2, because:
A) real wages rise in the long run.
B) nominal wages rise in the long run.
C) the real money supply rises in the long run.
D) aggregate real output rises in the long run.

Back 12

B) nominal wages rise in the long run.

Front 13

13. (Figure: AD–AS) Refer to the AD–AS diagram. Suppose the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. Finally the economy moves to E3. The classical model of price level:
A) assumes that the economy moves from E1 to E3 and ignores E2; thus, inflation increases but real GDP remains the same.
B) assumes that the economy moves from E2 to E3 and ignores E1; thus, real GDP increases but inflation remains the same.
C) assumes that the economy moves from E2 to E3; thus, inflation decreases but real
GDP remains the same.
D) assumes that the economy moves from E1 to E2 and ignores E3; thus, both inflation and real GDP remain the same.

Back 13

A) assumes that the economy moves from E1 to E3 and ignores E2; thus, inflation increases but real GDP remains the same.

Front 14

14. (Figure: AD–AS) Refer to the diagram in AD–AS. If our economy has low-level inflation and the Fed uses expansionary monetary policy, the initial effect is that:
A) AD1 will shift to AD2 and the economy will move from E1 to E2.
B) SRAS1 will shift to SRAS2 and the economy will move from E2 to E3.
C) SRAS2 will shift to SRAS1 and the economy will move from E3 to E2.
D) AD2 will shift to AD1 and the economy will move from E2 to E1.

Back 14

A) AD1 will shift to AD2 and the economy will move from E1 to E2.

Front 15

15. (Figure: AD–AS) Refer to the diagram in AD–AS. If our economy is at equilibrium and the Fed uses expansionary monetary policy:
A) AD2 will shift to AD1 and the economy will move from E2 to E1. Then very quickly nominal wages will rise, SRAS1 will shift to SRAS2, and the economy will move from E2 to E3.
B) SRAS1 will shift to SRAS2 and the economy will move from E2 to E3. Then AD2 will shift to AD1 and the economy will move from E2 to E1.
C) SRAS2 will shift to SRAS1 and the economy will move from E3 to E2. Then AD2 will shift to AD1 and the economy will move from E2 to E1.
D) AD1 will shift to AD2 and the economy will move from E1 to E2. Then very quickly nominal wages will rise, SRAS1 will shift to SRAS2, and the economy will move from E2 to E3.

Back 15

D) AD1 will shift to AD2 and the economy will move from E1 to E2. Then very quickly nominal wages will rise, SRAS1 will shift to SRAS2, and the economy will move from E2 to E3.

Front 16

16. According to the classical model of the price level, an increase in the money supply will create:
A) inflation with no long-run increase in real GDP.
B) inflation and a long-run increase in real GDP.
C) no inflation and a long-run increase in real GDP.
D) deflation with no long-run increase in real GDP.

Back 16

A) inflation with no long-run increase in real GDP.

Front 17

17. The inflation tax is:
A) the higher tax paid by individuals whose incomes are indexed to inflation.
B) the taxes paid during periods of inflation.
C) the reduction in the value of money that is held by the public caused by inflation.
D) the higher prices consumers pay due to inflation.

Back 17

C) the reduction in the value of money that is held by the public caused by inflation.

Front 18

18. Fiat money is:
A) money backed by gold.
B) money that only the government will accept to pay taxes.
C) paper money with no intrinsic value.
D) used only in the United States as a medium of exchange.

Back 18

C) paper money with no intrinsic value.

Front 19

19. If the money supply is $3 billion and inflation is 6%, the inflation tax is:
A) $3.18 billion.
B) $50 billion.
C) $180 million.
D) $1.8 billion.

Back 19

C) $180 million.

Front 20

20. If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is:
A) $5 billion.
B) $15 billion.
C) $60 billion.
D) $1500 billion.

Back 20

B) $15 billion

Front 21

21. If a high inflation rate leads people to ______ their money holdings, this may lead to a further increase in the money supply and ______ inflation.
A) reduce; lower
B) increase; lower
C) reduce; higher
D) increase; higher

Back 21

C) reduce; higher

Front 22

22. From 2000 to 2008 Zimbabwe's prices:
A) decreased by 50%.
B) increased by 50%.
C) increased by 100%.
D) increased by 80 trillion percent.

Back 22

D) increased by 80 trillion percent.

Front 23

23. Zimbabwe's economic instability was caused primarily by:
A) its joining the Coalition of the Willing in the Iraq war.
B) its attempts to join the European Union.
C) the government's seizure of the country's farms, which disrupted production.
D) its high tariffs on imported goods.

Back 23

C) the government's seizure of the country's farms, which disrupted production.

Front 24

24. When the output gap is negative, the actual unemployment rate is:
A) above the natural rate.
B) below the natural rate.
C) equal to the natural rate.
D) The actual and natural unemployment rates are not related to the output gap.

Back 24

A) above the natural rate

Front 25

25. (Figure: Actual and Natural Rates of Unemployment) Refer to the information in the figure. In 1982, the actual unemployment rate was approximately:
A) zero.
B) 4%.
C) 6%.
D) 10%.

Back 25

D) 10%.

Front 26

26. (Figure: Actual and Natural Rates of Unemployment) Refer to the information in the figure. In 1982, the cyclical unemployment rate was approximately:
A) zero.
B) 4%.
C) 6%.
D) 10%.

Back 26

B) 4%.

Front 27

27. (Figure: Actual and Natural Rates of Unemployment) Refer to the information in the figure. In 1982, the natural unemployment rate (structural plus frictional) was approximately:
A) zero.
B) 4%.
C) 6%.
D) 10%.

Back 27

C) 6%.

Front 28

28. The relationship between the output gap and the unemployment rate can be summarized thus:
A) When the output gap is negative, the unemployment rate is below the natural rate.
B) When the output gap is zero, the unemployment rate is also zero.
C) When there is an inflationary gap, the unemployment rate is above the natural rate.
D) When the output gap is positive, the unemployment rate is below the natural rate.

Back 28

D) When the output gap is positive, the unemployment rate is below the natural rate.

Front 29

29. Suppose actual aggregate output is equal to the potential output; the actual unemployment rate is:
A) equal to the natural rate of unemployment.
B) higher than the natural rate of unemployment.
C) zero.
D) equal to the cyclical rate of unemployment.

Back 29

A) equal to the natural rate of unemployment.

Front 30

30. If an economy has just had a serious recession but real GDP is expanding once again,
we can conclude the unemployment rate will:
A) automatically fall.
B) automatically rise.
C) actually rise, if people who were previously discouraged enter the work force but do not find jobs right away.
D) actually fall, if people who were previously discouraged enter the work force but do not find jobs right away.

Back 30

C) actually rise, if people who were previously discouraged enter the work force but do not find jobs right away.

Front 31

31. If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will:
A) not change.
B) rise.
C) fall.
D) be zero.

Back 31

A) not change.

Front 32

32. The idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5% is known as:
A) Okun's law.
B) Phillip's law.
C) Greenspan's law.
D) Keynes's law.

Back 32

A) Okun's law.

Front 33

33. The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of:
A) 4%.
B) 5%.
C) 6.5%.
D) 9%.

Back 33

C) 6.5%.

Front 34

34. According to recent estimates of Okun's law, if the unemployment rate fell by a full percentage point, it would most probably be attributable to a:
A) 3% increase in real GDP .
B) 2% increase in real GDP .
C) 1% increase in real GDP .
D) 3% decrease in real GDP .

Back 34

B) 2% increase in real GDP .

Front 35

35. Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract?
A) a reduction in the number of discouraged workers
B) an increase in the number of discouraged workers
C) an increase in the level of employment
D) a decrease in the level of employment

Back 35

B) an increase in the number of discouraged workers

Front 36

36. Okun's law suggests that:
A) a 1% increase in a positive output gap increases the unemployment rate by 0.5%.
B) a 1% increase in a positive output gap decreases the unemployment rate by 0.5%.
C) a 0.5% increase in a positive output gap increases the unemployment rate by 1%.
D) a 0.5% increase in a positive output gap decreases the unemployment rate by 1%.

Back 36

B) a 1% increase in a positive output gap decreases the unemployment rate by 0.5%.

Front 37

37. If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%:
A) disinflation is likely to occur.
B) there will be no effect on prices.
C) inflation will increase.
D) the short-run Phillips curve will shift down.

Back 37

C) inflation will increase.

Front 38

38. A supply shock caused by an increase in the price of gasoline causes:
A) a decrease in output and prices.
B) a decrease in output and an increase in prices.
C) an increase in output and prices.
D) an increase in output and a decrease in prices.

Back 38

B) a decrease in output and an increase in prices.

Front 39

39. The short-run Phillips curve shows:
A) a direct relationship between unemployment and inflation.
B) an inverse relationship between unemployment and inflation.
C) consequences of the misperceptions theory.
D) the optimal level of employment.

Back 39

B) an inverse relationship between unemployment and inflation.

Front 40

40. A supply shock:
A) moves our economy along the short-run aggregate supply curve.
B) moves us along the short-run Phillips curve.
C) shifts the short-run Phillips curve.
D) shifts the short-run aggregate supply curve but not the short-run Phillips curve.

Back 40

C) shifts the short-run Phillips curve.

Front 41

41. Along a Phillips curve:
A) consumption depends on prices.
B) the inflation rate varies inversely with the unemployment rate.
C) the inflation rate varies directly with the unemployment rate.
D) prices and tax rates are directly related.

Back 41

B) the inflation rate varies inversely with the unemployment rate.

Front 42

42. Suppose that the unemployment rate rises at the same time that the inflation rate declines. This situation would be consistent with a movement along the:
A) vertical Phillips curve.
B) horizontal Phillips curve.
C) positively sloped Phillips curve.
D) negatively sloped Phillips curve.

Back 42

D) negatively sloped Phillips curve.

Front 43

43. (Figure: AD–AS Model and the Short-Run Phillips Curve) Refer to the information in the figure. If the central bank increases the money supply so that aggregate demand shifts from AD1 to AD2, then real GDP will increase by:
A) zero.
B) 2%.
C) 4%.
D) 6%.

Back 43

C) 4%.

Front 44

44. (Figure: AD–AS Model and the Short-Run Phillips Curve) Refer to the information in the figure. If the central bank increases the money supply so that aggregate demand shifts from AD1 to AD2, then the inflation rate will be:
A) zero.
B) 2%.
C) 4%.
D) 6%.

Back 44

B) 2%

Front 45

45. An increase in the expected rate of inflation:
A) shifts the short-run Phillips curve down.
B) shifts the short-run Phillips curve up.
C) moves the economy along the short-run Phillips curve to higher rates of inflation.
D) moves the economy along the short-run Phillips curve to higher rates on unemployment.

Back 45

B) shifts the short-run Phillips curve up.

Front 46

46. Expectations of a higher inflation rate shift the short-run aggregate supply curve to the _________, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _________.
A) left; down
B) right; up
C) left; up
D) right; down

Back 46

C) left; up

Front 47

47. During the 1950s and 1960s, the short-run Phillips curve for the U.S. economy showed a(n):
A) positive relationship between unemployment and inflation.
B) inverse relationship between unemployment and inflation.
C) positive relationship between interest rates and inflation.
D) inverse relationship between interest rates and inflation.

Back 47

B) inverse relationship between unemployment and inflation.

Front 48

48. Stagflation is a combination of:
A) restrictive trade policies and inflation.
B) budget deficits and trade deficits.
C) unemployment and higher taxes.
D) unemployment and inflation.

Back 48

D) unemployment and inflation.

Front 49

49. An increase in expected inflation will affect the short-run Phillips curve:
A) by shifting it downward; the actual rate of inflation at any given unemployment rate will fall by the same amount.
B) by shifting it upward, as a result the actual rate of inflation at any given unemployment rate will also be higher when the expected inflation rate is higher.
C) by moving along the same curve, where it equals the actual rate of inflation.
D) only if the economy is at the nonaccelerating inflation rate of unemployment.

Back 49

B) by shifting it upward, as a result the actual rate of inflation at any given unemployment rate will also be higher when the expected inflation rate is higher.

Front 50

50. If the natural rate of unemployment _________, the NAIRU _________, and the long-run Phillips curve shifts to the left.
A) falls; falls
B) rises; rises
C) falls; rises
D) rises; falls

Back 50

A) falls; falls

Front 51

51. When workers and firms become aware of a rise in the general price level:
A) they will not do anything, because they know they are powerless to counter any
economic changes.
B) they will incorporate higher prices into their expectations of future prices.
C) firms with sticky prices will ultimately adjust their prices downward.
D) they will agree to renegotiate wage contracts downward.

Back 51

B) they will incorporate higher prices into their expectations of future prices.

Front 52

52. In the long run, when the actual inflation rate gets embedded into people's expectation:
A) the trade-off between inflation and unemployment becomes even stronger.
B) it is possible to achieve lower unemployment in the long run by accepting higher inflation.
C) there is no longer a trade-off between inflation and unemployment.
D) actual inflation at any unemployment rate is always higher than expected inflation.

Back 52

C) there is no longer a trade-off between inflation and unemployment.

Front 53

53. The NAIRU is:
A) the inflation rate at which the unemployment rate does not change over time.
B) a trade-off between unemployment and inflation.
C) the unemployment rate at which inflation does not change over time.
D) a rate at which it is possible to achieve lower unemployment by accepting higher inflation.

Back 53

C) the unemployment rate at which inflation does not change over time.

Front 54

54. Which of the following accurately describes disinflation?
A) It must be accompanied by a decline in the price level.
B) The inflation rate rises at a higher rate.
C) It is the process of bringing down the inflation that has become embedded in expectations.
D) It is a gradual reduction in the price level over time.

Back 54

C) It is the process of bringing down the inflation that has become embedded in expectations.

Front 55

55. To bring disinflation to an economy, policy makers must:
A) slow down labor productivity growth.
B) increase the money supply in order to release the economy from the liquidity trap.
C) keep unemployment below its natural rate for an extended period.
D) lower expectations about inflation.

Back 55

D) lower expectations about inflation.

Front 56

56. Analysis of the Phillips curve reveals that a __________ in unemployment, like that of the early 1980s, is needed to break the cycle of inflationary expectations.
A) permanent increase
B) permanent decrease
C) temporary increase
D) temporary decrease

Back 56

C) temporary increase

Front 57

57. (Figure: The Great Disinflation) Refer to the information in the figure. In the early 1980s, the inflation rate was beaten down by the Federal Reserve's tight monetary policy. In the short run this policy led to a ______ level of actual output and a ______ rate of unemployment.
A) high; high
B) low; high
C) low; low
D) high; low

Back 57

B) low; high

Front 58

58. The U.S. government reports a core inflation rate that excludes _____ and _____ prices to remove the volatility of those two sectors from inflation estimates.
A) housing; automobile
B) steel; housing
C) energy; food
D) gasoline; housing

Back 58

C) energy; food

Front 59

59. Deflation:
A) hurts borrowers and helps lenders.
B) helps borrowers and hurts lenders.
C) unlike inflation, affects neither borrowers nor lenders.
D) has effects on borrowers and lenders that depend on the amount of the loan.

Back 59

A) hurts borrowers and helps lenders

Front 60

60. The problem of debt deflation deepens during an economic slump because:
A) borrowers have to reduce spending to pay back burdensome debts.
B) the Fisher effect raises the nominal interest rate during a period of deflation.
C) lenders have to lower spending in order to accommodate higher returns from loans.
D) the zero bound on the nominal interest rate is broken.

Back 60

A) borrowers have to reduce spending to pay back burdensome debts.

Front 61

61. During periods of deflation _____ will be hurt and _____ will be helped.
A) firms; borrowers
B) borrowers; lenders
C) consumers; firms
D) home buyers; home sellers

Back 61

B) borrowers; lenders

Front 62

62. When economists state that there is a zero bound on nominal interest rates, they mean that:
A) the real interest rate cannot go below zero.
B) the nominal interest rate cannot go below zero.
C) the real interest rate can very well be negative.
D) the nominal interest rate can always go below zero.

Back 62

B) the nominal interest rate cannot go below zero.

Front 63

63. If the economy is in a liquidity trap:
A) both monetary and fiscal policies are effective.
B) neither monetary nor fiscal policy is effective.
C) monetary policy is effective, but fiscal policy is not.
D) fiscal policy is effective, but monetary policy is not.

Back 63

D) fiscal policy is effective, but monetary policy is not.

Front 64

64. Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is ________, it can be argued that ________ is (are) worse off.
A) above 3%; the bank issuing the certificate
B) exactly 6%; both the bank and Tony
C) below 3%; Tony
D) below 3%; the bank issuing the certificate

Back 64

D) below 3%; the bank issuing the certificate

Front 65

65. A liquidity trap is a situation in which:
A) using expansionary monetary policy is not effective because the real interest rate is negative.
B) aggregate demand falls because consumers do not have enough liquidity to consume.
C) using expansionary monetary policy is not effective because the nominal interest rate is almost zero.
D) lenders are trapped by large loans with declining rates of return.

Back 65

C) using expansionary monetary policy is not effective because the nominal interest rate is almost zero.

Front 66

66. A liquidity trap results from the:
A) inflation tax.
B) expansionary fiscal policy.
C) Fisher effect.
D) zero bound of the nominal interest rate.

Back 66

D) zero bound of the nominal interest rate

Front 67

67. The liquidity trap is associated with all of the following EXCEPT:
A) a large reduction in the demand for loanable funds.
B) the nominal interest rate falls to zero.
C) monetary policy becomes ineffective.
D) fiscal policy becomes ineffective.

Back 67

D) fiscal policy becomes ineffective.

Front 68

68. When Fed officials worried about the possibility of “Japanification” in the United States, it meant that they were worried that the U.S. economy would:
A) grow faster than the economy of Japan after World War II.
B) accumulate large trade surpluses, like Japan.
C) fall into a period of hyperinflation.
D) fall into a deflationary trap.

Back 68

D) fall into a deflationary trap.

Front 69

69. The measure used by the Fed that excludes food and energy prices is the:
A) consumer price index.
B) wholesale price index.
C) core inflation rate.
D) federal funds rate.

Back 69

C) core inflation rate.

Front 70

70. The Fed tries to keep the core inflation rate around: A) zero.
B) 2%.
C) 4%.
D) 5%.

Back 70

B) 2%

Front 71

71. (Figure: Short-Run Phillips Curve) Refer to the information in the figure. based on an expected inflation rate of:
A) zero.
B) 1%.
C) 2%
D) 5%.

Back 71

C) 2%

Front 72

72. (Figure: Short-Run Phillips Curve) Refer to the information in the figure. based on an expected inflation rate of:
A) zero.
B) 1%.
C) 2%.
D) 3%.

Back 72

A) zero

Front 73

73. (Figure: Short-Run Phillips Curve) Refer to the information in the figure. rate of unemployment is:
A) 3%.
B) 5%.
C) 7%.
D) 8%.

Back 73

B) 5%

Front 74

74. (Figure: Short-Run Phillips Curve) Refer to the information in the figure. The NAIRUis:
A) 3%.
B) 5%.
C) 7%.
D) 8%.

Back 74

B) 5%.

Front 75

75. Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be:
A) a decrease in the natural rate of unemployment and an increase in inflation.
B) a decrease in the natural rate of unemployment and no change in inflation.
C) no change in the natural rate of unemployment and an increase in inflation.
D) no change in the natural rate of unemployment and no change in inflation.

Back 75

C) no change in the natural rate of unemployment and an increase in inflation.

Front 76

76. In the long run, an increase in the money supply:
A) will increase real GDP and the price level.
B) causes people to hold onto large sums of money.
C) results in no change in real GDP.
D) encourages people to save more money.

Back 76

C) results in no change in real GDP.

Front 77

77. When an economy has high inflation:
A) wage and price stickiness lessen or disappear.
B) the Keynesian model of the economy is most relevant.
C) wages become more inflexible as workers wait for prices to stabilize.
D) changes in the money supply take much longer to affect the inflation rate.

Back 77

A) wage and price stickiness lessen or disappear.

Front 78

78. If a central bank pursues an expansionary monetary policy:
A) the aggregate price level and level of real GDP will increase in the short run.
B) the level of real GDP will increase, but the aggregate price level will stay the same in the long run.
C) nominal prices and nominal wages will be unaffected in the long run.
D) the aggregate price level will increase and the level of real GDP will decrease in the short run.

Back 78

A) the aggregate price level and level of real GDP will increase in the short run.

Front 79

79. Government's right to print money to finance deficits is referred to as:
A) open-market sales.
B) seigniorage.
C) fiat money implementation.
D) crowding out.

Back 79

B) seigniorage.

Front 80

80. When inflation is high:
A) people will increase their level of real-money holdings.
B) people will save more.
C) lenders gain at the expense of borrowers.
D) people will decrease their level of real-money holdings.

Back 80

D) people will decrease their level of real-money holdings.

Front 81

81. During an inflationary gap:
A) the unemployment rate is less than the natural rate of unemployment.
B) actual output is less than potential output.
C) the unemployment rate is equal to the natural rate of unemployment.
D) wages and prices must fall in order to restore the economy to its potential output.

Back 81

A) the unemployment rate is less than the natural rate of unemployment.

Front 82

82. A negative output gap is associated with:
A) an unusually low unemployment rate.
B) a natural rate of unemployment.
C) an unusually high unemployment rate.
D) no changes in the unemployment rate.

Back 82

C) an unusually high unemployment rate.

Front 83

83. A negative output gap implies:
A) an unemployment rate above the natural rate.
B) an unemployment rate below the natural rate.
C) an unemployment rate equal to the natural rate.
D) an unemployment rate that equals the frictional and structural amounts of unemployment.

Back 83

A) an unemployment rate above the natural rate.

Front 84

84. As a result of a downturn in the economy, a firm cuts back on workers' hours but does not fire workers. Following Okun's law, this is one reason:
A) the relationship between the output gap and the unemployment rate is positive.
B) the relationship between the output gap and the unemployment is negative and less than a one-to-one relationship.
C) a negative output gap is associated with an unusually low unemployment rate.
D) a positive output gap is associated with an unusually high unemployment rate.

Back 84

B) the relationship between the output gap and the unemployment is negative and less than a one-to-one relationship.

Front 85

85. Suppose an economy's aggregate price level increases and its aggregate level of real GDP decreases. This could arise from:
A) a positive demand shock.
B) a negative supply shock.
C) a positive supply shock.
D) a negative demand shock.

Back 85

B) a negative supply shock.

Front 86

86. If an economy's short-run Phillips curve shifts up, this is most likely due to:
A) a change in the inflation rate.
B) an increase in the unemployment rate.
C) an increase in expected inflation.
D) a contractionary fiscal policy.

Back 86

C) an increase in expected inflation.

Front 87

87. Disinflation:
A) involves eliminating inflation in an economy.
B) policy often results in plunging the economy into a major recession.
C) occurs as a result of a policy makers' attempts to correct a major recession.
D) results in a fall in the unemployment rate.

Back 87

B) policy often results in plunging the economy into a major recession.

Front 88

88. When an economy has debt deflation:
A) aggregate demand increases, since the real debt burden is reduced.
B) aggregate demand is not affected, since real variables are not affected.
C) aggregate demand decreases as borrowers' real debts increase, which leads to less spending.
D) the economy moves quickly to its potential output.

Back 88

C) aggregate demand decreases as borrowers' real debts increase, which leads to less spending.

Front 89

89. During a liquidity trap:
A) monetary policy is ineffective, since nominal interest rates cannot fall below zero.
B) the money market is in disequilibrium.
C) the only tool that the Federal Reserve finds effective is expansionary monetary policy.
D) nominal interest rates will rise regardless of what policy the Federal Reserve pursues.

Back 89

A) monetary policy is ineffective, since nominal interest rates cannot fall below zero.

Front 90

90. Investment banks differ from commercial banks because:
A) commercial banks are allowed to advertise, but investment banks are prohibited from advertising.
B) commercial banks can have offices only in one state, but investment banks can have offices in many countries.
C) commercial banks do not sell foreign currencies, but investment banks do.
D) commercial banks accept deposits from customers, but investment banks do not.

Back 90

D) commercial banks accept deposits from customers, but investment banks do not.

Front 91

91. A financial intermediary that provides liquid assets in the form of deposits to savers and
uses its funds to finance illiquid investment spending needs of borrowers is a(n):
A) insurance company.
B) bank.
C) pension fund.
D) hedge fund.

Back 91

B) bank.

Front 92

92. A shadow bank is a:
A) branch of the main office of a bank.
B) bank that is operated by a shadow government.
C) financial firm that is not closely watched or effectively regulated.
D) a credit union or a savings and loan institution.

Back 92

C) financial firm that is not closely watched or effectively regulated.

Front 93

93. Without banks, people would:
A) hold more of their wealth as cash.
B) hold less of their wealth as cash.
C) invest most of their wealth in real estate.
D) earn higher rates of return and enjoy more liquidity.

Back 93

A) hold more of their wealth as cash.

Front 94

94. Depository banks:
A) borrow on a short-term basis from depositors and lend on a long-term basis to others.
B) borrow on a long-term basis from depositors and lend on a long-term basis to others.
C) borrow on a short-term basis from depositors and lend on a short-term basis to others.
D) borrow on a long-term basis from depositors and lend on a short-term basis to others.

Back 94

A) borrow on a short-term basis from depositors and lend on a long-term basis to others.

Front 95

95. Most of a bank's short-term liabilities are:
A) loans from the Federal Reserve.
B) loans from the U.S. Treasury.
C) loans to its customers.
D) deposits of customers' savings.

Back 95

D) deposits of customers' savings.

Front 96

96. Maturity transformation is converting:
A) short-term liabilities into long-term assets.
B) short-term liabilities into short-term assets.
C) long-term liabilities into long-term assets.
D) long-term liabilities into short-term assets.

Back 96

A) short-term liabilities into long-term assets.

Front 97

97. Which of the following is an example of maturity transformation?
A) Anne sells her house for $200,000 and uses the money to open a bakery.
B) Matthew sells his car and uses the money to pay college tuition.
C) Justin takes $10,000 from his savings account and uses it to buy some Apple stock.
D) Michael closes his checking account at Bank of America and opens a checking account at a local credit union.

Back 97

C) Justin takes $10,000 from his savings account and uses it to buy some Apple stock.

Front 98

98. Which of the following is an example of maturity transformation?
A) Jordan borrows $15,000 to buy a car.
B) Aaron buys new running shoes and pays for them with his American Express credit card.
C) Angela gives Russell $100 in cash for a graduation gift.
D) Tyler lends $1,000 to his roommate Nick for a year.

Back 98

D) Tyler lends $1,000 to his roommate Nick for a year.

Front 99

99. Shadow banks differ from commercial banks because shadow banks:
A) accept deposits only from businesses and state and local governments, not from
individuals.
B) are not subject to as many regulations as commercial banks.
C) are not allowed to pay interest on deposits.
D) can operate branches in more than one state.

Back 99

B) are not subject to as many regulations as commercial banks.

Front 100

100. Since the early 1980s, shadow banks have increased because they:
A) are not subject to capital requirements and reserve requirements.
B) offer online bill payment to their depositors.
C) pay lower interest rates on their deposits than commercial banks.
D) offer lower interest rates on their commercial loans than commercial banks.

Back 100

A) are not subject to capital requirements and reserve requirements.